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Investment Banking

Investment Banking

30.03.2021

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The investment bank is a financial institution that arranges for large companies and governments to raise capital in the global financial markets, as well as provides consulting services for the purchase and sale of a business, brokerage services, being a leading intermediary in the trading of stocks and bonds, derivatives financial instruments, currencies, and commodities, and issues analytical reports on all markets in which it operates.

US banks were divided into commercial and investment banks in the 1930s due to the Great Depression. However, in 1999, the Glass-Steagall Act was repealed, and commercial banks were again allowed to engage in investment banking services.

The situation began to change in connection with the 2007-2009 crisis: many countries, including the United Kingdom and the United States, are discussing the issues of separating investment banking from commercial banking.

In foreign practice, the term “investment” usually denotes funds invested in securities for a long time. This is a theoretical reflection of real-life economic relations since investment mechanisms in a market economy are directly related to the securities market.

The investment activity of banks is viewed as a business providing two types of services. One of them is increasing cash flow by issuing or placing securities on their primary market. Another is the organization of a virtual meeting of buyers and sellers of existing securities in the secondary market, that is, the function of brokers and/or dealers. Investments are understood both as all areas of placing the resources of a commercial bank and as operations for the placement of funds for a certain period in order to generate income. In the first case, investments include the entire range of active operations of a commercial bank, in the second – its urgent component.

Bank investments have their own economic content. Investment activity in the microeconomic aspect – from the point of view of a bank as an economic entity – can be viewed as an activity in the process of which it acts as an investor, investing its resources for a period in the creation or acquisition of real and purchase of financial assets to generate direct and indirect income.

At the same time, the investment activity of banks has another aspect associated with the implementation of their macroeconomic role as financial intermediaries. In this capacity, banks help meet the investment needs of business entities. The demand for them in a market economy arises in monetary form. In addition, banks provide an opportunity to turn savings and savings into investments.

Thus, the investment activity of credit institutions is of a dual nature. Considered from the point of view of an economic entity (bank), it is aimed at increasing its income. The effect of investment activity in the macroeconomic aspect is to achieve an increase in social capital.

It should be noted that from the standpoint of economic development, the investment activities of banks include investments that contribute to the receipt of income not only at the bank level but also at the level of society as a whole (in contrast to those forms of investment activities that, ensuring an increase in the income of a particular bank, are associated with the redistribution social income). Consequently, from the point of view of macroeconomics, the criterion for classifying it as investment activity is the productive orientation of the bank’s investments.

Activities

A typical investment bank has the following functions:

  • Underwriting and Securities Trading;
  • Offering brokerage services to private and institutional investors;
  • M&A services;
  • Financial analytics and research;
  • Market makers for certain types of securities.

Mergers and acquisitions

Mergers and acquisitions for an investment bank operating in a country with a developed financial market, quite often become the main area of ‚Äč‚Äčincome. Many Russian enterprises and financial groups have not yet reached the level of development when there is a need for the services of an investment bank to carry out mergers and acquisitions. In the Russian context, mergers and acquisitions are often understood as operations with large blocks of shares. However, the activity of buying and selling individual enterprises is not the same as mergers and acquisitions. The activities of an investment bank during mergers and acquisitions can be subdivided into the following components:

  • consulting activities to determine the best option for business restructuring;
  • the attraction of financial resources for mergers and acquisitions;
  • accumulation of large blocks of shares on the market at the request of a client (purchase of large blocks of shares), sale of large blocks of shares;
  • restructuring of a separate company and sale of its parts;
  • development and implementation of effective protection of the client from takeover.

Financial analytics and research

One of the activities of investment banks is the provision of financial analytics on securities traded by the bank. This activity by itself is usually not profitable. On the contrary, it has become one of the most costly in investment banking. Therefore, this type of activity can be classified as intermediate between the external and internal activities of the investment bank. To carry out external activities, the investment bank also develops internal activities that provide normal operating conditions for those divisions that carry out external activities and make a profit. The largest items of income of an investment bank should include income from the provision of services to attract financing. This creates a conflict of interest between the analytical and external banking divisions. In the United States, independent analytical agencies have received significant support. Due to the new requirements, according to which investment banks, in addition to their own analytical reports, must provide their clients with independent analytics.

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